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Q1 2020 Austin Office Report

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Unprecedented times will undoubtedly affect Austin’s office market


Boots On The Ground
Commentary by Zach Ellis | Vice President | Austin

Our “Boots on the Ground” viewpoint is the voice of our experts, who have broken down the market data and compared it to what they are seeing for themselves. This is their take on what the numbers actually mean for the Austin office market.

January brought many of the sentiments that typically usher in a new year: optimism, excitement, eagerness and confidence based on not only the preceding quarter, but on the past year and numerous years before it. The first quarter of 2020 continued as it had in recent memory with headlines of tenants expanding or relocating to Austin, venture capital backing local startups, a near record-breaking construction pipeline, historically low unemployment rates, and our fair city topping the charts on most “Best Places to…” lists. Fast forward to Q2 and the headlines flooding our inboxes tell a different story.

Due to the global COVID-19 pandemic, most companies are being forced to reevaluate operations with health and culture in mind and redefine standards and best practices for each. What will the future of work look like and what is the impact of work from home (WFH) and a distributed workforce on productivity, space, and the sense of togetherness? Will density of workspaces decrease as higher importance is placed on personal space? How will technology and innovation propel us forward and will ballooning tech budgets be viable for all companies? How will building owners revive confidence in the safety of their buildings?

Though not all is doom and gloom. This market correction may loosen Landlord’s previously ironclad grip and return Austin to more nostalgic times for many tenants leasing office space. Combine this with a glut of sublease space surely to flood the market throughout 2020 and historically low interest rates, now is an optimal time for sure-footed companies looking to transact on leases and purchases while others take aim on the growing talent pool ripe with eager workers. People across the entire CRE spectrum (tenants, landlords, lenders) are all intertwined, codependent and are openly collaborating to find realistic solutions.

Future Forecast

The spirit of Austin has played no small part in fueling the success of those who call it home. This spirit has not changed and is why our city will continue to prosper once the current crisis is (mostly) in the rearview mirror.

Necessity breeds innovation. Every downturn has ended in an upturn. This too shall pass. Whatever your mantra may be during trying times, we are all in this together and we will persevere. The future may currently be unclear, but we are confident there is a headline just around the corner showcasing an Austin company who did not succumb, but faced their challenges head on and innovated the world of tomorrow for us all.

By The Numbers - Austin's Office Market

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Rates inclusive of estimated operating expenses. Average rates include sublease rates, which are much lower than direct rates.

Austin Office Overview

In the first quarter of 2020, Austin’s office market reported 35,453 SF of negative net absorption. A large amount of the negative absorption occurred in Class A buildings with a total of 271,539 SF of negative net absorption. Class B buildings in Austin posted 209,275 SF of positive net absorption, and Class C properties recorded 26,811 SF of positive net absorption.

There is 5,319,761 SF of office space under construction and 1,443,977 SF of that is pre-leased. Looking forward, the second quarter of 2020 we expected to record 1,078,653 SF of deliveries with 356,673 SF of that being pre-leased, but COVID-19 may change those projections. One of the buildings set to deliver in the second quarter of 2020 is Highland 3 at 523 East Highland Boulevard; the entire 250,000 SF building is 100% leased prior to delivery.

Domain 12 at 11800 Alterra Parkway was the largest building to deliver in the first quarter. This 320,102 SF building delivered in February and is 100% leased to Facebook. The second quarter of 2020 is expected to see eleven new buildings come online, but it is likely that many of those deliveries will be pushed back. The citywide average rental rate increased over the quarter from $35.83 per SF in Q4 2019 to $35.93 per SF in Q1 2020. Class A rental rates in Austin’s CBD decreased by 1.3% over the quarter from $53.43 per SF to $54.16 per SF in the first quarter of 2019. The overall suburban Class A rental rate decreased from $38.22 per SF to $37.49 per SF, over the quarter.

In February, The Wall Street Journal announced that Austin ranks as the number one market for jobs in the United States. A significant factor for this ranking is the fact that many major tech companies making Austin their second home. Apple announcing it’s new campus in North Austin is a great example. Comparatively, Austin has a much more affordable housing market compared to other tech cities, such as San Francisco, while also offering a highly skilled workforce and laid-back yet active culture.

Due to the COVID-19 outbreak, we are now seeing companies laying off many skilled workers just so they can survive this downturn. As we watch the unemployment numbers rise, we can also look forward to the talent that awaits once the economy begins to bounce back and companies can begin hiring again.

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Vacancy & Availability

Austin’s citywide vacancy rate increased from 12.7% in the fourth quarter of 2019 to 13.0% in the first quarter of 2020. The East submarket’s Class A vacancy rate had the largest jump in vacancy moving from 2.3% in Q4 2019 to 17.1% in Q1 2020. This was caused mostly by 37,597 SF being vacated at 901 East 6th Street.

The largest decline in vacancy was recorded in the Class C Northeast submarket, where the rate decreased from 34.8% to 7.3%, which is due to 62,299 SF at Promontory Point (2433 Ridgepoint Drive) being taken off the market.

Absorption & Demand

Austin’s office market posted 35,453 SF of negative net absorption in Q1 2020. Despite this, eight submarkets experienced positive absorption over the quarter, including CBD, Cedar Park, Central, Far Northeast, Far Northwest, Round Rock, Southeast and West Central.

A large amount of the negative net absorption over the quarter occurred in the Class A Southwest submarket, totaling 143,773 SF of negative absorption. In January, Endeavor put 32,994 SF of it’s space at 7000 West at Lantana, Building 2 (7000 William Cannon Drive West) on the market. An additional 39,714 SF was put on the sublease market at The Park at Barton Creek, Building 2 (3711 South MoPac Expressway). In all, 184,468 SF became available in the Class A Southwest submarket.

The Southeast submarket helped bring the absorption number closer to zero with 175,911 SF of positive net absorption. The majority of the absorption in the Southeast submarket happened in Class B space and can be partially attributed to World Class Capital withdrawing a total of 94,775 SF in two spaces at both 8201 East Riverside Drive and 7401 Ben White Boulevard from the market.

The Austin market recorded thirty-seven leases over 10,000 SF each in the first quarter with a large renewal leading the way. 3M signed a renewal for their 204,339 SF space at Parmer 3.3 (13011 McAllen Pass), while Atlassian Corporation inked a new deal for 157,540 SF at 1401 East 6th Street.

Rental Rates

According to CoStar, our data provider, Austin’s citywide average rental rate increased 0.13% over the quarter from $35.83 per SF to $35.93 per SF.

The highest rental rates across the Austin office market in the first quarter were in CBD Class A buildings where net rental rates average $53.43 per SF. Rental rates were also high in the South submarket where Class A rental rates reached $47.62 per SF.

Citywide Class B rental rates rose marginally in Q1 2020 to $32.67 per SF up from $32.01 per SF in Q4 2019. CBD Class B rental rates increased by 2.4% over the quarter from $50.23 per SF to $51.43 per SF in Q1 2020.

Leasing Activity

Austin’s office market recorded 1,079,068 SF of leasing activity in Q1 2020. Major transactions this quarter included 3M’s lease renewal for 204,399 SF at 13011 McAllen Pass and Atlassian Corporation taking 157,540 SF at 1401 East 6th Street in the East submarket. The Southwest submarket has eight new leases signed with the largest belonging to Wells Fargo. Wells Fargo took just over 45,000 SF at 5301 Southwest Parkway.

Sales Activity

Austin’s office investment sales activity in Q1 2020 consisted of two building transactions, including one portfolio transaction. In February, Schlosser Development purchased 1111 West 6th Street from Austin Independent School District. The sale price was not made public for that purchase. PRP Real Estate Investment Management purchased two buildings in a portfolio, one of them being 13011 McAllen Pass, a 204,400 SF building where 3M offices. PRP purchased the buildings from Karlin Real Estate for $102,157,297.

Office Development Pipeline

5,319,761 SF of office space was under construction during Q1 2020. Ten buildings delivered in Q1 with the largest being Domain 12. This 320,102 SF building was 100% leased by Facebook well before delivery. Facebook signed the lease for the entirety of the building in September of 2018. 27% of all space under construction is already pre-leased and over 1,000,000 SF is set to deliver in Q2 2020. It is very likely that most of these dates get pushed back due to the delay caused by COVID-19.

Q1 2020 Office Highlights

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Q1 2020 Austin Office Report

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Related Experts

Kaitlin Holm

Marketing Coordinator

Austin

Kaitlin joined Colliers Houston office in April 2015 after graduating from Florida Gulf Coast University with a degree in Communications. Kaitlin was the Marketing & Research Coordinator and worked closely with her team consisting of Crissy Nolen, Director of Marketing and Lisa Bridges, Director of Market Research. 

As a marketing professional in the Colliers' Houston office, Kaitlin maintained the Colliers marketing platform via a multitude of channels including our website, listing services, and internal communications. In addition, she assisted Lisa Bridges in researching the Houston office, retail, and industrial markets to populate quarterly market research reports. 

In 2016, Kaitlin moved to the Colliers Austin office as a Project Coordinator.  She prepares in-house office and industrial market reports and works closely with the company's brokerts to develop effective custom market research material specific to both existing and potential clients. In addition, she maintains all property marketing.

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Zach Ellis

Vice President

Austin

Zach Ellis specializes in providing all facets of tenant representation services for corporate office users and has solely done so since beginning his commercial real estate career in 2007. Prior to joining Colliers in 2014 as Vice President, Zach established a strong reputation for success by representing his client’s best interests for seven years at a local brokerage firm. Zach’s narrow focus and longevity have enabled him to become a true expert in his field.

With more than 250 transactions under his belt in excess of $35 million, Zach has the experience and proven track record of an industry veteran. His hard work ethic, in-depth market knowledge, and keen problem solving and negotiating skills make him a trusted strategic partner for many of the exciting companies residing in Austin, TX and beyond.   Zach is a member  of the Global Life Sciences Practice Group within Colliers which specializes in innovative real estate solutions for the fields of Pharmaceutical, Biotechnology, MedTech, and Medical Device companies.   

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